Facing a Bankruptcy Audit?

When the 2005 bankruptcy reform law was passed, a provision was added that mandates that one out of every 250 non-business related bankruptcy filings be randomly selected for audit.  Some debtors filing bankruptcy fear having to face a bankruptcy audit; but knowing what you could face during an audit could help to ease some of that fear.

Here’s what you need to know:

  1. Any bankruptcy case which is selected for an audit will be reviewed by an auditing firm.
  2. Audits are not “secret” processes which are just sprung upon you. Once a debtor’s bankruptcy case has been selected for an audit, he/she will be notified along with their bankruptcy attorney.
  3. The auditing firm will give the debtor a choice; a) the auditing firm can communicate primarily with the debtor or b) communicate exclusively with their bankruptcy attorney.  For smart bankruptcy debtors, the best choice is obvious.  Allowing your bankruptcy attorney to handle the audit process is in your best interests.
  4. The auditing firm reviewing the bankruptcy case is searching for instances of bankruptcy fraud which is deliberate and for “material misstatements.”  For example, if the debtor made statements which were untrue and significantly impacted the outcome of the bankruptcy case, that would be considered a material misstatement.  Material misstatements can either be unintentional or intentional.
  5. About 50 percent of all bankruptcy cases selected for audits have material misstatements which are found by the auditor. But just because a material misstatement is found does not mean that the debtor will be automatically charged with bankruptcy fraud. If it was an honest mistake, it is not likely to end in a bankruptcy fraud charge but it could change the outcome of the case.